Company limited by guarantee vs incorporated association for not-for-profit organisations
Choosing the right legal structure is an important decision for any organisation. For many not-for-profit and non-trading organisations, be they charities, community groups, or sporting clubs, the decision will often narrow down to a trust, incorporated association or company limited by guarantee. Here, we explore the differences between registering a charity or not-for-profit as an incorporated association or a company limited by guarantee.
What is a company limited by guarantee?
As its name suggests, a company limited by guarantee, (also commonly referred to as a ‘guarantee company’) is a company (or corporation) which, upon incorporation (or registration) is granted its own separate legal identity along with a myriad of other benefits and entitlements.
Incorporation is often the paramount consideration for many organisations seeking to limit the exposure of its officers and members to risk and liability.
Unlike other types of corporations, however, a company limited by guarantee does not have shareholders or a share capital (shares). Instead, it is made up of members who agree, or ‘guarantee’, to contribute a specified amount (usually a nominal amount) towards any undischarged liabilities should the company be wound up or become insolvent.
Having no shareholders or dividends does not mean that a company limited by guarantee is prohibited from earning profits. It does mean, however, that any surplus must be reinvested towards the organisation's objectives.
This provides members and participants of the organisation with some comfort knowing that their contributions will benefit all, and not individual persons.
Companies limited by guarantee are generally subject to greater and more frequent reporting obligations than incorporated associations, and are overseen by a large national regulator, the Australian Securities and Investment Commission (ASIC).
Reporting obligations are intended to ensure accountability to members and the broader community. While these obligations may come at a cost (for example, higher establishment fees and ongoing costs), many perceive that cost as a small price to pay for peace of mind.
What is an incorporated association?
An incorporated association is a corporation not unlike a company limited by guarantee. It is granted its own separate legal identity from that of its members, and it is precluded from distributing any dividends or income directly to members.
Where the two diverge is, principally, a matter of jurisdiction. Incorporated associations are registered under the State or Territory’s laws in which they are located, as opposed to a company limited by guarantee, who is registered under federal law and recognised throughout the whole of Australia.
The laws in each State and Territory governing incorporated associations typically provide for greater ease of compliance and comprehension than their federal counterpart, to enable smaller organisations to establish and operate efficiently and economically.
This often translates to reduced and less onerous reporting obligations than guarantee companies.
Registering a charity as a company limited by guarantee or incorporated association
Guarantee companies and incorporated associations are unable to distribute profits, or ‘dividends’, to members. It is the combination of this attribute, along with incorporation that makes them particularly attractive to organisations seeking to register as a charity.
Organisations seeking to attain registered charity status, and the many tax concessions that accompany it, must be able to demonstrate to the Australian Charities and Not-for-profits Commission (ACNC) that they are not-for-profit.
While other legal structures, by their nature, satisfy this not-for-profit requirement, the company limited by guarantee structure offers incorporation at a national level, throughout Australia.
Company limited by guarantee vs incorporated associations
For most not-for-profit and non-trading organisations, the choice of legal structure will narrow down to two options:
- a company limited by guarantee; or
- an incorporated association.
Incorporated associations provide a relatively inexpensive and straightforward means of incorporation and this structure is designed for smaller clubs and other not-for-profit associations and societies. However, their registration at a State or Territory level can hinder the organisation’s ability to carry on its affairs and business outside the State or Territory in which they are registered.
The initial fees to establish a company limited by guarantee are higher than for an incorporated association and the ongoing costs are generally greater too.
Registering a charity or not-for-profit at a State or Territory level
Each Australian State and Territory has its own regime for the incorporation of associations, which is typically far less onerous than the regime provided by the national corporations legislation. However, unlike the national corporations legislation, the legislation in each State and Territory may differ and they are by no means uniform.
Some State and Territory regimes can restrict incorporation to only associations formed for specific purposes. For example, in Queensland, school council or parents and citizens associations are precluded from incorporation under the Associations Incorporations Act 1981 (State-based legislation).
Incorporation is also not always available simply on compliance with the requirements set out in the respective legislation of that State or Territory. Registration may depend on the discretion of the respective regulator or official administering that legislation. The respective legislation may provide for discretionary power to the regulator to refuse a certificate of incorporation to an association in circumstances where it would be inappropriate or undesirable.
A company limited by guarantee legal structure is ideally suited to many not-for-profit and non-trading organisations, including charities, community groups, and sporting clubs. It remains the most appropriate method of incorporation in circumstances where the activities of an organisation extend beyond a single State or Territory.
But it is not a ‘one-size fits all’ proposition. The complexity of the national corporations legislation and the relatively higher cost involved in complying with it have made it difficult for some organisations to implement the necessary changes to adapt to this legal structure. Before embarking on the process to incorporate as a company limited by guarantee, organisations should seek specialised legal advice to determine whether the structure is right for them.
Speak with a lawyer who helps not-for-profit organisations
Hall Payne Lawyers have extensive experience and expertise assisting and advising charities, community and sporting groups and not-for-profit organisations.
If your organisation is contemplating incorporation or adopting a different legal structure, contact us to arrange a consultation with one of our team.
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This article relates to Australian law; either at a State or Federal level.
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances. For further information, please do not hesitate to contact Hall Payne Lawyers.